Archive for June 8th, 2013

As Economy Stalls, Inflation Heats Up and Maduro Seems Clueless

June 8, 2013


Maduro badly imitating Chávez, what is he smiling about?

The week brought really bad news on the economic front, as the Venezuela Central Bank reported that the economy stalled in the first quarter, growing by a meager 0.7%, while inflation really heated up, increasing by 6.1% for the month of May (up from 4.3% in April). Both numbers were worse than expected by analysts and economists.

The internals of the inflation numbers were even worse. Twelve month inflation is now running at 35.2% (Inflation  for 2012 was 20.1%), while Food and Beverages went up by 10% in May, that group is now up 27.8% for the year and 49.9% in the last twelve months. Inflation is already up 19.4% for the year, compared to a devaluation of 31% in February. The scarcity index stood at 20.5% in May, barely budging from the same number in April. Even worse, many of the basic products currently under price controls, have yet to receive approval for price increases since the devaluation in February. Meanwhile, the black market rate has reached a new all time high.

To make all of this even more worrisome, is the fact that Maduro was sworn in nine weeks ago and he has yet to announce any significant change to economic policy. Soon after being sworn in, Maduro said that the Government would make the parallel rate fall and it is now 32.4% higher than when he won (sic) the election. And while investors and the private sector wait for announcements, Maduro makes non-announcements (Sicad was going to start again three weeks ago, there will be no devaluation)

But Maduro keeps saying things that may sound good to the “people”, but are either false or will make him look bad in the future. He said that what was coming was “the strengthening of our currency and our economy”, which at this point is an impossible target for the currency in 2013 and an iffy proposition for a growing GDP in 2013. Maduro also asked for applause for Minister of Finance Merentes “who is fixing our economy”, while in reality Merentes has shown that he does not have the power to guide economic policy, as he has yet to make a single change since being named Minister in April. (Even his road show to New York and London to talk to investors was cancelled soon after it was sort of announced). And Merentes may improve the foreign exchange system, but he is no economist and thus does not know the tools to attack the many distortions in place.

And Maduro may simply be clueless or have really bad advice. Yesterday he said that the reason inflation went up like this in May is because of “overheated consumption”, while the Government’s own numbers show that the growth in consumption slowed down between the fourth quarter of 2012 and the first quarter of 2013 from 7.1% to 3.1%. Maybe Maduro should be briefed on the effects of money printing and deficit monetization.

By now, in addition to the higher inflation and the stalling of the economy, the result of the Government’s inaction is that the bond issuance (likely directly in US$) that will certainly take place in the upcoming weeks, will be more costly than eight weeks ago. Between the fear of new issuance, the drop in US Treasuries and the lack of new policies, the prices of Venezuela and PDVSA bonds have been punished harshly in the last nine weeks. This means that before Maduro was elected, the benchmark Venezuela 2027 bond was yielding 9.18%, which last Thursday stood 11.48%, before dropping sharply on Friday to 10.88%. This means that any new issuance will be between 1.5% and 2% more costly than six or eight weeks ago. (US$ 45 to 60 million a year for the length of the issue of a US$ 3 billion bond)

About the only positive note is that Minister of Energy and Oil Rafael Ramirez has managed to sign some deals worth about US$ 9 billion with Rosfnet, China and Chevron, showing that he has more power than many. Except that none of what he did  implies cash flow any time soon, as the major chunks of all the deals are for expenses in PDVSA’s projects with these partners. The only one that implies money for PDVSA is a loan from Rosfnet to PDVSA of US$ 1.5 billion, capped at US$ 300 million per year for five years and so far, it is only a Memorandum of Understanding.  The other “loans”, are all going back to the “Giusti” model, where the purse strings are controlled and held by the partner and not PDVSA. Fourteen years of a revolution to end up in the same place.

At least, that new money will go in the long run for increased oil production, something the country needs, but the revolution has ignored for too long.